Transcript 5. The Quantity of Medical Care Demanded

THE QUANTITY
OF MEDICAL
CARE
DEMANDED
Part I: Basic Demand Concepts
Definition - The demand analysis
seeks to identify factors that are most
influential in determining how much
health care that consumers are willing
and able to purchase at given prices.
Purpose – A better understanding of
the demand relations provides
insights into the various health care
issues to be explored in health care
economics.
Points of clarification
1.
2.
3.
The demand for medical care is “derived”
from consumers’ demand for health (or
stock of health).
It is not synonymous to an act of purchase
or an utilization of health service. A
purchase or utilization is “realized
demand.”
Health care is different and the differences
pose a “shopping problem” for
patients/consumers.
Is Health Care Different?
Viewed from the perspective of demand,
health care differs from ordinary consumer
goods in several important respects:
1.
Uncertainty
2.
Idiosyncratic patient needs
3.
Asymmetry of information
4.
The inseparability of diagnose and
treatment and the resulting dual role of
physicians
5.
Complex price structure of health care
1. Uncertainty


One never knows when he/she will get
sick and how bad the condition might
be when sick.
Uncertainty refers to the random
nature of the incidence of illness and
the inherent variations in treatment
outcome.
“… the special economic problems of medical
care can be explained as adaptations to the
existence of uncertainty in the incidence of
disease and in the efficacy of treatment.”
Kenneth Arrow
Consequences of Uncertainty
Origin
Type
Primary coping
strategy
Secondary
Effects
Secondary Strategies
Incident of
Illness
Insurance
Moral Hazard
Copays, deductibles, Preauthorization, utilization reviews
and other managed care tools, and
now payment reform
Treatment
Outcomes
Principal-Agent
Relationship
Agency Problem
Licensure, Regulation, Nonprofit
Hospitals and reliance on PCPs
Uncertainty
2. Idiosyncratic patient needs


No two patients are exactly alike;
Every patient must be treated
individually (no assembly-line
production)
Tailor-made services cost more
3. Asymmetry of information




Buyers and sellers need good
information about prices and quality
of products for the market to
function well
Information is scarce in health care
Health professionals know more
than patients about diseases and
healing processes
Consumers/patients must divulge
information to assist in the
diagnostic process
4. Physicians as a service provider

Physician care – The product and the
activity of production are identical



In most instances, the provider has just
one chance to do it right and the customer
cannot test the product before deciding to
buy or not
Advertising and overt price
competition are virtually nonexistent
Patients have a shopping problem
5.Complex price structure of health care



In addition to the numerous prices charged for
a myriad of services and procedures, the price
of health care is complicated by insurance and
price-like incentives such as deductibles and
co-payments
Lack of price transparency
Price is not measured solely in the amount of
money must be paid. Other measures of prices
include:
 Price of time
 Pain and suffering
 Price of compliance
Medical Care and Utility
• Medical care is an input in producing health
 Subject to law of diminishing marginal productivity
• Health yields utility to the consumer
 Subject to law of diminishing marginal utility
Medical Care and Utility
We can generally graph the relation between
medical care and utility as follows:
Utility
Medical Care
Consumer’s Optimal Choice of
Health
Define :
MU = marginal utility of medical care
P = price
q = quantity of medical services
tradeoffs
z = quantity of all other goods


Given the consumer’s income, she chooses q
and z to maximize utility.
Utility maximization rule :
MUq
MUZ
Pq
Pz
Consumer’s Optimal Choice of
Health

Total utility reaches its peak when the
marginal utility gained from the last $ spent
on each product is equalized
i.e. The consumer equalizes “the bang for the
buck” across all goods
Proof

Suppose that instead :
MUq
Pq
>
MUZ
Pz
 Last $ spent on medical care generates more U than
last $ spent on other goods
 Consumer could U by purchasing more medical care
(q), and less other goods (z)
 Then MUq would fall, MUz would rise, until the 2 ratios
are equalized
Deriving a Demand Curve for
Physician Visits
Note : Now let q represent physician visits

Suppose Pq rises. This will lead to :
MUq
Pq <
 Consumer can

Pq
MUz
Pz
U by purchasing less q, and more z
lower demand for q
Deriving a Demand Curve for
Physician Visits

Downward sloping demand curve for physician
visits
Price
P1
P0
q1
q0
• Price changes lead to movements along D curve
Deriving a Demand Curve for
Physician Visits (cont.)

Consumer’s purchase of medical care is a
“derived demand”
• i.e., “no direct” utility from visiting the doctor
• U derived from health resulting from
dr. visit:
U = U(h,z)
h = h(q,…)
Other Economic Factors Affecting
Demand
1. Income

If income increases, then at any given price,
consumer is willing and able to purchase more q
Price
D1
DO
P0
q0
q1
Physician Visits
Other Economic Factors Affecting
Demand
2. Complements - 2 or more goods which
are consumed together




e.g.
e.g.
e.g.
e.g.
left shoes and right shoes
laser printers and toner cartridges
alcohol and cigarettes?
contact lenses and optometrist visits
Other Economic Factors Affecting
Demand
2. Complements


e.g. contact lenses and optometrist visits
If contact lenses become cheaper, demand for optometrist
visits ___
Price
Price of complement
falls
D0
D1
Optometrist Visits
Other Economic Factors Affecting
Demand
3. Substitutes - other goods which satisfy the
same wants, or provide same characteristics



e.g. Coke and Pepsi
e.g. Physicians and Nurse practitioners?
e.g. generic and brand name drugs
Other Economic Factors Affecting
Demand
3. Substitutes - other goods which satisfy the
same wants, or provide same characteristics


e.g. generic and brand name drugs
If generic drugs in price, D for brand name ___
Price
Demand for brand name
drug falls
D1
D0
Brand name drugs
Elasticities
Price
A relatively flat demand curve
implies that a small increase in
price leads to a large fall in #
visits demanded
# Visits
Elasticities
Price
A relatively steep demand curve
implies that a small increase in
price leads to a small fall in #
visits demanded
# Visits
Elasticities (cont.)

Own-Price Elasticity of Demand:
ED 


% QD
% change in quantity demanded

% P
% change in price
Example: If the elasticity of demand for physician visits is .6, a 10% increase in price leads to a 6% decrease in the
number of visits demanded.
Elasticities are scale-free
 We can compare the ED for physician visits vs. nursing
home days, even though they are consumed in different
units.
More price elastic demand leads to a flatter
demand curve.
Price
Relatively elastic
Relatively inelastic
# Visits
Elasticities (cont.)

Income elasticity of demand:
% QD
% change in quantity demanded
EY 

% Y
% change in income


Example: If the elasticity of demand for physician visits
is .1, a 10% increase in income leads to a 1% increase
in the number of visits demanded.
For most types of medical care, EY should be positive.
Except in special cases, the ED is different
on different points of the demand curve
P
ED = -
4
ED = -1
2
ED = 0
4
Demand curve: Q = 8 – 2P
8
Q
Insurance
Price
P
cP
q
qc
# Visits
• No insurance : consumer faces price P, makes q visits
• W/ coinsurance : consumer faces price cP, wants to
make qc visits
Insurance (cont.)
Price
P
cP
q
qc
# Visits
 Coinsurance leads to a demand of qc visits at price P,
shared by consumer and insurance company
 Demand curve rotates clock wise